Retirement Planning. Retirement Planning is no passing phase… You could spend 2/3 of your life...

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Retirement Planning

Transcript of Retirement Planning. Retirement Planning is no passing phase… You could spend 2/3 of your life...

Retirement Planning

Retirement Planning is no passing phase… You could spend 2/3 of your life planning

for retirement. Retirement planning begins with your first

“real” job and lasts for the rest of your life! First you save the nest egg…then you

spend it responsibly so as not to outlive it!

But I’m a state employee…I’ll get a pension when I retire. Why should

I save for retirement?

Good Question!

Here are some more questions…..Pop Quiz!

At what age do you plan to retire?

A. Never! I’ll have one foot in the office and the other in the grave!

B. 70 or above

C. 65-67 (or age when I’d get full social security benefits)

D. 60 or below

How Long Will You Be In Retirement?

(What is your life expectancy)

Fill in the Blank: The general rule of thumb is that retirement income will need to replace ____% of your working income.

A. 30-60%

B. 40-70%

C. 70-100%

The average replacement percentage of average final compensation for all new retirements in the N.C. Teachers and State Employees’ Retirement System tends to be around ____%.

A. 85%B. 65%C. 45%D. 25%

Time to Answer All of Our Questions!

At what age do you plan to retire?

This answer depends on your personal goals, but:

Beware of “Never”: you still need to plan for retirement even if you never plan to retire!

Remember, the earlier you plan to retire, the more planning you have to do!

How Long Will You Be In Retirement?

(What is your life expectancy?)

Did You Know? A 65-year-old man has 20% chance of living to age

90. A 65-year-old female has a 32% chance. For married couples, there is a 45% chance that one

spouse will live to this age. Source: Vanguard Investments at www.vanguard.com

Underestimating life expectancy can derail any retirement plan!

Fill in the Blank: The general rule of thumb is that retirement income will need to replace ____% of your working income.

A. 30-60%

B. 40-70%

C. 70-100%

C. 70-100%

Most planners estimate that you will need 70-100% of your pre-retirement income to maintain the same standard of living when you retire.

The average replacement percentage of average final compensation for all new retirements in the N.C. Teachers and State Employees’ Retirement System tends to be around ____%.

A. 85%B. 65%C. 45%D. 25%

C. 45%

Your actual benefit could be higher or lower depending on age and years of service and survivor benefits.

My pension and social security will generate enough income to meet the 70-100% rule of thumb. Do I still need to save elsewhere? Yes! You’ll need available resources other

than fixed income for: Emergencies To hedge against the effects of inflation which

could outpace cost-of-living increases to benefits.

So, why do you need to be saving for retirement in addition to your pension plan?To Bridge the Gap! To be prepared for emergencies!To help offset the effects inflation!If you haven’t started saving

already, get started now!

The Compounding Effect Start saving early! Time matters…

Start Age 25 Age 35 Age 45

Total

Contributions$1,000

X 40

$40,000

$1,000

X 30

$30,000

$1,000

X 20

$20,000

Value at 65 at 6%

$154,762 $79,058 $36,786

Earnings $114,762 $46,058 $16,786

The Compounding Effect

Plus, the longer you wait, the more it “costs” to save:

To match the $154,762 retirement balance of the 25-year-old in the example, the person who waited until 45 would have to: Save $4,207.14 per year, or Generate annual earnings of 18.45%

per year, or Retire at the age of 85!

Tax-Advantaged Retirement Accounts for State Employees

NC 401(k) plan NC 457 plan (Deferred Compensation) 2010 Deferral limits:

$16,500 if under age 50 $22,000 if age 50 or over Not aggregated

Individual Retirement Accounts (IRAs)

Types: Traditional (potential for tax savings now) Roth (potential for tax savings in retirement)

Contribution Limits for 2010 $5,000 if under age 50 $6,000 if age 50+ ($5,000 limit plus $1,000 catch-up

provision) Contribution Deadline

January 1 of current year – April 15 of following year

RETIREMENT SAVINGS PLAN

Save for retirement

Use an available tax- advantaged account

Decide how to invest my savings

Investing Basics

Considerations when choosing investments: Diversification Time Horizon Risk Tolerance

**Past performance is not a guarantee of future returns.

Taking Risks Why should I Put My Money At Risk?

When saving long-term, you are battling a little monster named:

INFLATION

The Effects of InflationThe Effects of Inflation

Today:Today:

Cost of 1 dozen oranges = $4.00Cost of 1 dozen oranges = $4.00

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The Effects of InflationThe Effects of Inflation

In the 1960’s, $4.00 would have bought you: 1 gallon of milk ($.60) 2 dozen oranges ($.90) 10 gallons of gas

($.25/gallon = $2.50)

You could also buy:¨ A new house for $15,000¨ A Ford Mustang for $2,368

The Effects of InflationThe Effects of Inflation

If the cost of oranges were to increase over the next 50 years at the same rate that it has increased since 1960, the price of a dozen oranges would be….

Bottom Line…

Investing in securities provides the potential for returns that can outpace inflation over time.

If you will be investing for the long-term, you may want to consider investing in securities.

Am I on track for retirement?

No way to know for sure. Keep in mind: You are responsible for providing at least a

portion of your own retirement income You might live beyond your life expectancy Starting early is the key!!!!

So, I’ve saved my nest egg and now I’m ready to retire, now what?

Your focus now changes from saving for retirement to spending your savings.

New goal: Avoid outliving your income.

Important Steps…

Step 1: Determine your retirement income needs by creating a spending plan using actual expenses.

Step 2: Subtract the amount you will receive from social security, pension, etc.

The difference is what you’ll need to use from your savings each year.

Tools

Many financial institutions including the credit union have calculators that will help you determine if your desired annual withdrawals from your savings will allow your nest egg to last during your retirement.

Calculator Example

Retirement Balance = $250,000 Estimated Rate of Return = 5% Estimated Rate of Inflation = 3% Desired Annual Withdrawal (1st year) = $20,000 Would last about 14 years Or, could withdraw $10,600 and would last 30

years

I used a calculator and the results said that I’d have money left over at my life expectancy age.

Great! You may want to look into establishing set aside funds such as:¨ Emergency Funds¨ Inheritance

See how your long savings will last after setting aside these funds. If you can still meet your monthly income needs, great!

I used a calculator and the results said that I’d run out of money early

You may need to tweak your retirement income plan by considering: Revisiting your variable expenses and discretionary

spending. Part-time employment Increasing your fixed income by investing a portion of

your savings in a low-cost fixed annuity.

Reviewing your Retirement Plan

Revisit your retirement income plan annually and make adjustments accordingly.

Calculators and tools can be useful, but are based on assumptions! Reviewing your plan annually will greatly increase the chance that your savings will last throughout your retirement!

ANY QUESTIONS???